Mergers and acquisitions of schools
The fall out between Roedean School (a registered charity) and a group of its alumnae (the Old Roedeanians) over the school's management of its finances, following on from its acquisition of girls school Moira House, has brought into focus the topic of charity mergers and acquisitions. It has been reported in the press that the Old Roedeanians concerned criticised Roedean's decision to acquire Moira House (which closed in 2020 due to unsustainable financial losses) in 2017 and guarantee £3 million in loans.
This amongst other criticisms and actions taken by the Old Roedeanians concerned resulted in the Charity Commission requesting that mediators be brought in to try to bring an end to the antagonism.
The matter highlights the complexity of charity mergers and acquisitions along with the potential adverse impact that decisions made as part of the process can have. However, a successfully merged/acquired charity can reap significant benefits for the charity's beneficiaries, not least the improvement of services provided by the charities when combining forces that render them more effective and cost efficient.
So, what can trustees of charitable status schools who are considering merging with, or acquiring another, charitable status school do to seek to ensure that such restructuring will be successful? Whilst the precise approach and process for a merger and those for an acquisition will differ, there are key common factors that need to be considered in each:
The trustees' overriding duty will be to ensure that any merger or acquisition will be in the best interests of the charity beneficiaries. Charity trustees have a duty to make balanced and adequately informed decisions, thinking about the long term as well as the short term, and use reasonable care and skill to inform their decision making in the interests of their beneficiaries.
At the outset, trustees must have clarity over the reasons for any intended merger or acquisition, identifying both the potential benefits and the potential obstacles. There must be clear value in the proposal in order to justify proceeding.
Essential to this will be carrying out due diligence. Trustees will need to do their homework in finding potential "target" schools which have charitable objects, culture, senior management and parent bodies that would complement their own. Synergy between the charities concerned will be essential to ensure any long term success.
The financial aspects
Charity trustees have a duty to ensure that their charity remains solvent and to use charity funds wisely. Often, one of the main objectives of a merger or acquisition will be to ensure the long term financial sustainability of one or more of the charities involved.
However, trustees considering a merger or acquisition must go into it with their eyes open; it will be a major project with costs involved, which cannot be underestimated. Any long term expected benefits must justify that cost. Key to managing this will be setting aside sufficient levels of funding for the project, keeping the costs under review and ensuring that any steps taken as part of the restructuring, such as due diligence, are proportionate to the risks/benefits involved.
Further, a merger or acquisition can potentially expose a charity to additional liabilities and this must be properly explored in line with charity trustees' duties not to expose their charity's assets, beneficiaries and reputation to any undue risk. In the case of Moira House, according to the press, the Charity Commission found that its finances continued to worsen after the loan cash injections that Roedean House had guaranteed as part of the acquisition.
It serves to highlight the utmost importance of a health check being carried out in respect of any target school to understand the school's financial position: What is its level of debt and liabilities? Do assets exceed liabilities? Is there anything unusual that requires investigation? Any risk areas need to be addressed thoroughly.
In assessing the long term financial benefits of the merger/acquisition, it will be important to set realistic projections on estimated pupil numbers and income. One of the factors leading to Moira House's closure was apparently declining pupil numbers.
The legal aspects
Planning well in advance and obtaining professional advice at an early stage are key to securing a successful merger or acquisition.
At the outset it will be necessary to determine whether the charities concerned have the power to merge and legal advice may be needed for this. Such a power could be expressly set out in the relevant governing document or it could be statutory or implied.
Trustees may need advice on the suitable structure for a merged charity as well as considering between themselves who is going to lead it. Further, trustees should consider whether the charity being acquired or any of the original entities of the merging charities should be retained as a "shell" charity with the Charity Commission to guard against any risk of future legacies not reaching them in their new merged/ acquired form.
Legal advice would be needed in drawing up the all important agreement setting out the terms of the acquisition or merger as well as advice on the steps to transfer staff, assets (particularly where land is concerned) and liabilities.
The schools will be required to inform and consult with their employees about the merger or acquisition within specific time frames under TUPE regulations (which give employees of transferring organisations rights to enjoy the same terms and conditions of employment with the acquiring organisation that they had pre-transfer). Employment advice on the TUPE process as well as on the management of any post-transfer redundancies/dismissals will be needed. Sensitive handling of this will be essential as will addressing staff morale during this process.
The schools will need to review their staff's pension arrangements and consider any pension related liabilities (for example, related to underfunded pension funds) which might arise following the merger/ acquisition. Advice would be needed on consultation requirements relating to any pension changes.
If there is to be any name change to the school and any related rebranding as a result of the restructuring, intellectual property advice may be required.
Third party consents
Consideration will need to be given at an early stage to whether any third party consents will be needed; this is likely to include Department for Education consent and possibly also from the Charity Commission.
The latter might be required for example if there is no express power to merge, or the charitable objects need to be amended to make the schools' objects more compatible. Consent might also be necessary where the transaction gives rise to potential conflicts of interest or if there is to be a transfer of school land as part of the transaction, depending on the powers of the charities concerned.
Charity Commission consents can take time, particularly if there are permanent endowment funds/ assets involved (i.e. where the capital cannot be spent) and a scheme or order is required to deal with them. The application process for such consents should therefore be actioned as soon as reasonably practicable.
Trustees will also need to consider whether any other consents will be needed - for example, from a lender if any land passing hands is subject to security, from the landlord if there is leasehold land and/or even planning consents if there are plans to develop any of the school sites as part of the merger/ acquisition. Contractual consents might also be needed, for example from insurance providers. Allowing sufficient time to obtain these consents is critical in the planning process.
Confidentiality and communication
The erosion of confidence of certain Roedean stakeholders following the Moira House acquisition serves to highlight the importance of considering the positions of parents, pupils and staff as part of any merger or acquisition. Communication with them is key, albeit of course at a time when the trustees deem it in the interests of the charities concerned for the information to be publicised.
This can be a fine balancing act. On the one hand, retaining confidentiality can aid the efficacy of the transaction and reduce any surrounding uncertainties. However, on the other hand, a later surprise disclosure can bring about anxiety and loss of confidence on the stakeholders' part.
As and when the trustees decide to make the announcement, in any communications it will be imperative to focus on the positive outcome that the merger or acquisition is intended to bring about. The schools will need the support of their stakeholders to seek to ensure their longevity.
Whilst navigating a school merger or acquisition can be complex with many delicate issues to manage along the way, there have been many success stories. Even before the disruption caused by the Covid pandemic, schools have considered joining with other schools to improve their offering or protect other schools with similar objects.
In response to the financial difficulties brought about by the Covid pandemic, we may now see increasing interest in such mergers and acquisitions amongst schools which, with early forward planning and careful due diligence, can mark a successful turning point in improving pupils' education through combining forces.